Josh Golden, SVP, Strategy
Average Wholesale Price (AWP) Is Broken
It’s high time we acknowledge the truth. AWP, the sacrosanct index that dictates drug prices for virtually all self-insured benefit plan sponsors in the United States, is broken. After years of manipulation and runaway inflation, it is almost completely uncorrelated to actual drug prices. Yet Pharmacy Benefit Managers (PBMs) continue to rely on this irrational price index as the backbone of their contracts with benefit plan sponsors because it opens the door to unchecked profitability and keeps them from being accountable for actual drug costs.
Capital Rx is the only PBM in the industry that has ditched AWP in favor of what we believe is a more rational drug pricing system. Our company was founded on the principle that Nothing Is Sacred when it comes to the existing drug supply chain… put another way, we believe “That’s how it’s always been done” is often the worst rationale for continuing to do something.
With that mindset, we took a cold, hard look at AWP. Here’s what we figured out…
The Problems with AWP
No drug price list is perfect. But AWP is perhaps one of the most flawed and problematic of the bunch. It is the industry standard partly due to historical coincidence (“That’s how it’s always been done”), but the biggest reason it is so widely used is that it drives tremendous profit opportunities for the PBMs and other supply chain middlemen.
We are certainly not the first to raise concerns about AWP. Those who have been in the industry for more than a decade can vividly recall the spate of class-action lawsuits associated with this pricing benchmark. In 2006, multiple pharmaceutical manufacturers were accused of recklessly inflating AWP in their pursuit of profitability. A second lawsuit settled in 2008 exposed widespread fraud and collusion between drug wholesalers and the private companies that publish AWP. Hundreds of millions of dollars were paid out as part of the settlements. It was a messy time for the supply chain, to say the least.
Setting aside its sordid history, here are just a few of the present-day drawbacks associated with AWP:
- AWP is almost completely uncorrelated to actual drug prices. We’ve all heard the joke before… AWP stands for “Ain’t What’s Paid.” At the heart of that humorous quip is a nugget of truth. Manufacturers set AWP, and, in some ways, it represents the starting point for price negotiation (much like the sticker price on a car). But after the inevitable discounts, rebates, and other purchasing incentives are loaded in, AWP becomes a horrible predictor of the true cost of any drug product. Depending on the drug in question, the “real” price that a patient or plan sponsor pays might be 95% less than AWP (i.e., for a deeply discounted generic) or 25% more (as is the case with some compound prescriptions).
- AWP paves the way for contractual games. Organize drugs into certain categories (like brands vs. generics), and AWP behaves in a slightly more predictable manner. Brand drugs tend to be sold at a discount of 16% to 19% off AWP in the retail setting. Generic discounting is both deeper and more variable but may end up averaging 75% to 85% over time. PBMs use these patterns to rationalize the “bucketing” of drugs when they make financial promises to clients. For example, PBM contractual guarantees for AWP discounts are almost always broken out into Brand and Generic buckets. This wouldn’t be a problem if everyone in the industry unanimously agreed on how to divvy up drugs into these buckets. Alas, there is no consensus, so it’s left to each PBM to determine this for themselves. And that is how one of the grandest shell games in all of healthcare is born. By creatively moving drugs from one bucket to another, PBMs can artificially inflate their reported results, “juicing” the outcome by five percentage points or more in some instances.
- AWP. Keeps. Going. Up. Even when the real price of drugs goes down, AWP relentlessly increases over time. That’s exactly what has been happening with generic drugs. There is an ever-growing gap between generic list price (AWP) and reality (actual acquisition cost). And since PBMs force their clients to negotiate based on AWP, they have turned this gap into a gold mine of profiteering. The way this works is easy to figure out for mail-order prescriptions. It costs the PBM less and less to acquire generic inventory each year, yet they charge clients based on AWP (which, much to their delight, continues to go up). In the retail setting, it’s a bit more nuanced. PBMs use complex layers of proprietary price lists (known as Maximum Allowable Cost lists, or MACs) to set pricing at the drug level, squeezing out profits with remarkable precision. Regardless of the delivery channel, the result is the same: patients and plan sponsors never get to enjoy the full value of generic price deflation.
Entrenched profiteers within the drug supply chain would have you believe that AWP is the only viable method for pricing drugs. Put simply, they are wrong. Capital Rx has over 62,000 pharmacies in our NADAC-based retail network, which proves the viability of a better reference price. So, what the heck is NADAC? Glad you asked.
NADAC: Not Perfect, but Definitely Better
As large PBMs continue to insist that AWP is the only way to do business with their employer clients, the industry has quietly been accommodating alternative pricing models within government programs for years. The vast majority of state Medicaid plans have already ditched AWP in favor of a more transparent “Medicaid Acquisition Cost” index called NADAC (National Average Drug Acquisition Cost). I’ll spare you all the geeky details about how NADAC is calculated (you can easily Google that). Instead, I’d like to highlight a few reasons that state programs have moved to this model, which are the same reasons that Capital Rx has adopted NADAC as our new standard for drug pricing.
Expanding upon What is NADAC & How Does It Differ From AWP?:
- NADAC is designed to measure the actual acquisition cost for each drug. It represents the retailer’s true cost of acquiring the drug into inventory, which means that NADAC reflects the actual economics in the supply chain. When the real cost of a drug goes down, NADAC follows suit and deflates. This eliminates the PBM’s ability to “mine the pricing gap” for profit, as they do with AWP.
- NADAC behaves consistently across brands and generics. From a contracting standpoint, this is a BIG DEAL. Under NADAC, there’s no need for brand/generic pricing guarantee “buckets” that can easily be manipulated with cat-and-mouse contractual games. The unnecessarily complex structure is replaced with a simple equation for every claim: NADAC + pharmacy dispensing fee.
- NADAC is crazy simple to audit. First, unlike AWP, NADAC data is free and accessible by anyone. Want to check whether the NADAC on a drug claim is correct? You can pull up the full price list with a few clicks on your smartphone. And since NADAC arrangements eliminate the need for “bucketed” performance metrics, your auditor won’t have to waste time arguing with the PBM over drug category definitions or exclusions. Last, you don’t need to wait until the end of a year to check the accuracy of your pricing – NADAC is auditable at the claim level, making annualized “rolling average” guarantees irrelevant.
NADAC is by no means perfect. It is self-reported by pharmacies via a survey, so it’s an estimated “blended average” of actual drug costs, not a precise measure at the chain level. Also, a handful of drugs will not have an assigned NADAC price (usually <1% of a typical client’s utilization). But there are relatively easy workarounds for these issues. And while we hope and strive for a perfect model, we’ll take “way better” over the status quo any day.
I don’t blame you if your head is spinning a bit from all the acronyms and technical nuances. Drug pricing is complicated. But we have an opportunity to simplify it dramatically, and in doing so, we can eliminate the stealthy profiteering that occurs under AWP.
If you’re dealing with a PBM vendor opposed to changing the current flawed drug pricing system, it raises an obvious question: “Who stands to gain from keeping that system in place?”
CLICK HERE to get in touch and discuss how our NADAC-based Single-Ledger Model™ works and aligns with plan sponsors' goals.